The money factor is a fee that is added to the total monthly payment on a new or used car lease. In other words, it's your vehicle's lease payment expressed as a percentage of the total cost of the vehicle.
The Money Factor: Definition and Examples
The money factor is a fee that is added to the total monthly payment on a new or used car lease. In other words, it's your vehicle's lease payment expressed as a percentage of the total cost of the vehicle. In an email to The Balance, Imani Francies, a loan expert with US Insurance Agents, explained, "When a person leases a car, he or she pays for the amount by which the vehicle's value depreciates during the period he or she owns it." "The monthly lease payments include depreciation, taxes, and interest." Even though the money factor is similar to the interest paid on loans, it may not be mentioned in a lease agreement. According to Francies, unlike an annual percentage rate (APR), which is required by law to be disclosed to a consumer seeking a loan, a leasing agent has no legal obligation to reveal or explain the money factor to the consumer. "Most dealers won't tell you unless you ask—and most customers aren't aware that they should—but it's critical information because it's used to calculate your monthly payments," Francies explained. If the money factor is mentioned in your lease agreement, it will almost always be expressed in decimal rather than percentage form. So, what should a consumer be aware of when it comes to the money factor? A good start is comparing the money factor to auto loan interest rates. "When converted to APR, the money factor should be comparable to, if not lower than, national new-car loan interest rates," Francies said. "The lower your monthly lease payments and overall financing costs are, the smaller the money component." Lease fee and lease factor are other names for the same thing.The Money Factor in Action
"The customer's credit score determines the money factor," Francies explained, which is a good reason to check your credit score on a regular basis. The bank or financing company's rate and the dealer's commission markup, also known as the "buy/sell rate," influence it. A general formula is used to calculate the money factor: Lease Charge / (Capitalized Cost + Residual Value) * Lease Term = Money Factor You can get an interest rate by multiplying the money factor by 2,400. In contrast, if you know the APR, you can calculate the money factor by multiplying it by 2,400. Assume that you and the car dealer or leasing agent agree to pay $45,000 for a used sport utility vehicle that you want to lease for three years. The vehicle is worth $15,000 at the end of the lease, and you paid $7,000 in finance charges over the course of the lease. $7,000 divided by $45,000 plus $15,000 multiplied by 36 equals the money factor. To figure this out, multiply the residual value by the number of months the vehicle was leased, divide the finance charge by the capitalised cost, and add the finance charge result. The formula is as follows:- $7,000 / ($45,000 + $15,000) * 36 = Money Factor
- That is, in this case, the money factor is 0.0032407.
- Multiply that number by 2,400 to convert it to an APR.
- The annual percentage rate (APR) is 7.78 percent.
Important Points to Remember
- The money factor refers to the cost of financing a monthly lease payment.
- Although the money factor is calculated in your payment, leasing agents are not required to disclose it, unlike loan interest.
- The bank or lending agency decides on the money factor, the credit score and history of the customer, and the leasing agent's commission markup.
- The money factor is multiplied by 2,400 to get the APR.
- The money factor should be on par with, if not less than, the interest rate on a new car loan.
